Housing On The Mend But Confidence Thin

Last week I wondered if the housing sector had finally hit bottom. There's a good case for arguing "yes," although the bigger question is whether housing will be a contributor to overall economic growth? That's still a mystery in terms of timing, but the odds are looking better for the optimistic outlook is increasingly relevant. Perhaps we'll find some fresh clues in the update for January's housing starts, scheduled today (but not out at the time of writing). The consensus forecast called for a moderate increase over December, according to Briefing.com.

The continued rise in home builder confidence, via yesterday's update on the NAHB/Wells Fargo Housing Market Index (HMI), suggests that we should expect a recovery in housing starts. “Builder confidence has doubled since September as measured by the HMI,” says NAHB chairman Barry Rutenberg, a home builder, in a press release. “Given the recent improvements in new home starts and the increasing number of markets included in the NAHB/First American Improving Markets Index, this consistency suggests that the housing market is moving toward more sustainable growth.”

A graph from Calculated Risk implies that the sharp rise in HMI will soon lead to a jump in housing starts.

This index of homebuilders' sentiment is still at miserably low levels, but the improvement in recent months is striking. Things have really improved on the margin, and that is what is most important—not the level, but the change on the margin. This also suggests that housing starts, which rose 25% last year, are likely to continue to pick up.

Housing's contribution to economic growth (GDP) can be as high as 18%, according to NAHB. The opposite effect is possible too, and we've had a long stretch of that in recent years. But the negative influence has recently faded to something approximating a neutral state. If housing is now set to become a sustained force for growth, even at a modest level, that's just what the economy needs to keep the recovery going at this stage.

"The story here is that pent-up demand is being freed by much easier mortgage conditions, low rates and rising employment," says Ian Shepherdson, chief U.S. economist for High Frequency Economics. "It's real."

The stock market seems to agree. As CNBC reports: "There’s an awful lot of optimism that housing is going to turn around. The iShares Home Construction Index is up 50 percent since October. Builders like Ryland (NYSE:RYL), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM) are at new highs. Not a lot of room for error!"